Table of Contents
What is, and how to use a volume indicator?
Volume trading is the act of estimating the amount a particular asset has traded in a specific time. The volume of a stock trade is estimated based on the number of shares traded. The volume of futures and options is estimated based on the number of contracts exchanged. Traders use the volume of trade to specify the liquidity of an asset, in combination with technical indicators.
Analyzing volume patterns over a long period can enable traders to know the level of momentum behind the rise and fall of trade and the market as a whole. The same applies to options and futures traders because ready g volume signals the option’s current interest. Additionally, volume is a crucial part of technical analysis. A good technical indicator makes use of the volume of trade in its analysis.
What is a volume indicator?
Volume indicators are used by traders in combination with technical tools to estimate the rise and fall of security. Most volume indicators focus on the buying and selling pressure to specify the side that is in control of the market. Other types focus on determining the sentiments that are driving the market at a certain period. For instance, an extremely high volume compared with its moving average propels fear in the market, while a low volume compared to its moving average can propel disinterest in the market.
As mentioned earlier, these indicators estimate shares in the stock markets, price movements in the currency market, and contracts in the options and futures market. All types of indicators attempt to attain the same type of technical evaluation. When the volume of a market rises, it means that the market is increasing, and prices are rising. Same for when the volume of the market decreases, it indicates the market is declining, and assets are being sold off. When the volume of a market is low and the price of the trade keeps increasing, it indicates that a bearish price reversal is about to occur, conversely, when a market is declining on increased volume it indicates a possible bullish price reversal.
The Forex market uses volume to estimate the momentum of price action within a specific time frame, instead of analyzing the buy and sell orders individually. Forex traders always analyze the open interest in the currency futures market in combination with the buy and sell orders. Irrespective of the market, tease analysis is carried out by using the price action in combination with the volume of the trade. This process is used in trend confirmation, identifying possible reversals, and specifying the weakness of a trend.
Types of volume indicator
There are three main types of volume indicators used by traders. These indicators are mathematical formulas that are illustrated visually in a charting platform. Each indicator provides a different formula, and teasers are advised to use the indicator that best suits their trading plan.
Indicators are not mandatory but enable traders to make good and concise trade decisions. There are a lot of volume indicators to pick from, but first, let’s look at the most popular three-volume indicators used by traders.
Chaikin Money Flow
This volume indicator is an easy-to-use highly effective indicator. When the market closes higher volume is added, and when the Market closes lower, volume is subtracted. This process displays the number of trades that are being bought. It also displays price breakouts, like when the value of a trade increases with a decreased volume, or the volume is rising with low momentum.
Chaikin Money Flow
It is stipulated for the volume of trade to increase as
the price of trade increases. Chaikin Money Flow concentrates on the rising volume when prices close high or low of their day-to-day range. It then offers a value to represent the strength of the trade.
When the price of trade closes high in its day’s range, with increased volume, the value of the strength will be high. When the price of a trade closes low in its day’s range, with decreased volume, the value of the strength will be negative. This indicator can be used as a short-term trading technical tool because it acts as an oscillator, however, this indicator is mainly used for determining price reversals.
The rise and fall of the value of trade below the zero line can be utilized in analyzing a trade. This indicator adds the bought and sold volumes over a particular time frame.
PROS AND CONS OF VOLUME INDICATOR
The Pros of volume indicator
Confirmation of price trends
A volume indicator helps traders to confirm price trends. This is done by identifying the volume of trade. The volume of trade shows the way the market is going. In a case where the price of the market is rising but the volume of the market is dropping, it shows a potential price reversal.
Identifying price breakouts
A volume indicator is one of the top tools used by traders to determine a price breakout. For instance, when the price of a trade is bearish but the volume of the trade is increasing, it indicates a possible price breakout and a potential price reversal. This helps a trader to know when to open a trade.
Cons of volume indicator
Volume indicators are good technical tools used by traders. However, this indicator cannot be used in isolation, because the volume of a trade is not a determining factor when analyzing a trade. Other factors come into play, such as the past price of the trade and the fundamental and sentimental factors. This is why traders are advised to use the indicators in combination with other technical tools.
Volume indicators are great analytic tools that are used in combination with other technical tools to provide good trading analysis. This helps traders to make good trading decisions about their trades. What is and how to use a volume indicator was explained in this text, and it is one of the easiest technical tools to use. Check out our top brokers and start testing the volume indicators!